Financial analysts call Conoco-Phillips merger a survival maneuver

Nov. 19, 2001
Financial analysts Monday generally approved the proposed stock-swap merger of Houston-based Conoco Inc. with Phillips Petroleum Co., Bartlesville, Okla., although one described it as a maneuver "to survive, not thrive" in the current downturn.

Sam Fletcher
OGJ Online

HOUSTON, Nov. 19 -- Financial analysts Monday generally approved the proposed stock-swap merger of Houston-based Conoco Inc. with Phillips Petroleum Co., Bartlesville, Okla., although one described it as a maneuver "to survive, not thrive" in the current downturn.

In a telephone conference call Monday, analysts also noted the new ConocoPhillips' debt level of $18.6 billion and the lack of a premium payment to either company through what corporate executives are calling a "merger of equals" valued at $35 billion. Recalling Conoco Chairman and CEO Archie W. Dunham's often-repeated claim that "bigger isn't necessarily better" and the fact that the two companies failed to complete a previous downstream joint venture, some analysts asked, "Why now?"

However, company officials claim the new company will have a strong balance sheet with an expected debt-to-capitalization ratio of 35%.

The two companies stocks "have traded close to each other" for the past 3 years, said James J. Mulva, chairman and CEO of Phillips.

And this merger will be both bigger and better, replied Dunham, creating the third-largest integrated US energy company based on market capitalization, oil and gas reserves, and production. ConocoPhillips also will be third largest in North America in terms of natural gas reserves, as well as the largest refiner in North America and fourth largest worldwide, he said.

More important, the two companies are complementary in their holdings and share the same goals "top to bottom," said Mulva.

Dunham said 57% of ConocoPhillips' total performance is in its upstream operations, which will "grow to 60%-70% in time." Although both Conoco and Phillips are weighted more toward oil reserves and production, he said, "Both want 50% gas. We're close to that now."

ConocoPhillips could cash in on the gas technology and expertise developed by each company, officials said.

Earlier this year, Conoco announced plans to build a $75 million demonstration plant in Ponca City, Okla., to commercialize its proprietary technology for converting natural gas to liquids (OGJ Online, May 14, 2001). Slated for completion next September, the demonstration plant will convert gas into 400 b/d of sulfur-free diesel, jet fuel, and other products. After proving the low-cost GTL technology, the demonstration plant will test new gas-conversion and petrochemical technologies.

Conoco expects to begin construction of its first commercial GTL plant by 2004. That technology "will give us a leg up" in development of stranded gas reserves around the globe, said Dunham.

Moreover, Mulva said, the new company's strong position in Asia will open opportunities in the liquefied natural gas market (LNG). Total Asian-Pacific LNG demand is expected to grow by 16 million tonnes/year (tpy) in 2000-05 and by 30 million tpy during 2005-10 (OGJ, July 16, 2001, p 68).

In addition, Dunham said ConocoPhillips will "be in the best position" to resume operations in Libya and Iran when the US government finally lifts its unilateral ban on business dealings with those countries.

Although the US recently extended for another 5 years economic sanctions against companies and countries that do business with Iran and Libya (OGJ Online, July 27, 2001), Dunham said he's confident that trade with those two countries will be opened..

Contact Sam Fletcher at [email protected]